Tomorrow's Gold?

Puru Saxena
15 Dec, 2005

The majority of precious metals
are at record-highs. Platinum, gold as well as silver are soaring
due to the excessive liquidity floating around the planet. Money
supply growth is rising fast in most nations today and this sector
has been the biggest beneficiary.

Despite the ongoing bull-market in precious metals, palladium
has (so far) not joined in the party and here lies a fantastic
investment opportunity. Palladium is a precious metal, one of
the platinum group metals (PGM), which are typically are found
in ore deposits.

In my opinion, palladium is
getting ready to march ahead. Palladium's bear-market, which
lasted roughly five years, is now over and a new bull-market
is underway.

In order to make profitable
investment decisions, it always pays to study the primary drivers
behind prices - supply and demand. In the case of palladium,
supply and demand dynamics are getting better and this should
translate into much higher prices.

On the supply side, Russia
is by far the world's largest producer of palladium, followed
by South Africa and North America. A few years ago, Russia caused
a supply shock by declaring that it would not sell palladium
in the following year. This announcement caused prices to spike
and palladium peaked in early 2001 at $1,050/ounce.

On the demand side, catalytic
converters for automobiles constitute roughly 50% of palladium's
use while jewellery, electronics and dental-work make up the
rest.

A catalytic converter is a
metallic device, which is implanted in automobiles to reduce
harmful carbon emissions. Depending on prices and availability,
auto manufacturers often switch between palladium and platinum
as both can be used to build catalytic converters. One thing
is for sure, the demand for catalytic converters can only go
up from here as the 2.4 billion Chinese and Indians start buying
more automobiles as they become more affluent.

As palladium prices jumped
higher on the Russian news five years ago, auto manufacturers
dumped expensive palladium in favour of platinum, which was still
relatively cheap. As demand for palladium dried up, it caused
a severe decline in prices (as falling demand always does) and
the metal went down to $170/ounce recorded earlier this year.
In other words, the price of palladium fell by an astronomical
85% from its peak! On the other hand, as the demand for platinum
grew bigger, its price headed north. Today, platinum trades above
$1,000/ounce compared to palladium, which is much cheaper at
$270/ounce. So, the situation has now reversed in favour of palladium
and (once again) auto manufacturers are starting to choose the
cheaper substitute, which will push palladium's demand, hence
price to appreciate in the future.

Moreover, palladium's demand
for white-metal jewellery is also rising rapidly in China where
the growing middle class is embracing this high purity and relatively
affordable metal. In fact, the manufacture of jewellery has now
become the second biggest application for palladium as demand
surges to 1.43 million ounces this year - a result of a more
than 70% increase in the production of palladium jewellery in
China!

Source: Johnson
Matthey

To put things in perspective,
last year's annual supply of palladium was 7.9 million ounces
whereas total demand came in at 6.5 million ounces. This created
a massive surplus causing prices to drop below $200/ounce. This
year, demand for palladium is forecast to rise by 400,000 ounces
to 6.9 million ounces. Most of this growth will be due to a rise
in purchases of the metal for jewellery in China. Supply of palladium
will drop however by an estimated 370,000 ounces to 7.5 million
ounces. The previous year's surplus will therefore be cut by
more than 50% to roughly 600.000 ounces.

Markets forecast the future
and tend to move in anticipation of the news. Accordingly, palladium
has already started climbing and has appreciated by almost 30%
over the past month alone! So, you can see that favourable shifts
in supply and demand have started the new bull-market in palladium,
which is still in its early days. Other precious metals such
as gold, platinum and silver are at record-highs whereas palladium
is still trading at a 75% discount compared to its peak recorded
in 2001. This situation is unsustainable and palladium should
play "catch up" over the months ahead. If my assessment
is correct, the price of palladium could rise significantly and
the metal may turn out to be the best performing investment you
ever made.

Experienced investors can consider
investing in long-dated futures contracts or you can buy physical
palladium bullion. Another way to participate is by investing
in shares of palladium producing companies, which will go through
the roof as palladium's bull-market gathers steam. Most of such
shares went down dramatically during palladium's four-year bear-market
and have only started rising. My advice is to select companies,
which have a large quantity of palladium reserves in their mines.
Their stock price should rise exponentially as palladium becomes
more expensive. Finally, this is a generational bull-market in
commodities, which has a long way to go.

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Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.